The Fed surprised the market last week not by keeping rates steady but by dropping a few dots. The string of hikes expected this year by FOMC members dropped last Wednesday from four to two and markets moved. Treasury yields dropped, market inflation expectations rose and equity prices jumped. The market saw less about growth in the dots and more about continued policy support. But the Fed's next surprise could unwind the market impact of last week.

The dots dropped despite a loosening in financial conditions since January, steady signs of growth, improving employment and, more importantly, relatively high core inflation. The Fed's preferred core PCE inflation came in for January at 1.7%, up 0.4% in the last three months. The Fed in December had projected 1.6% for all of 2016 and left that projection unchanged last week.

The Fed's reference to global economic risks last week clearly suggests that weakness in Europe and Asia weighed heavily in the policy calculus. That's a bit of a surprise since the international links to US growth and inflation historically are loose. Perhaps the Fed worries about new links through financial conditions. Those remain tighter than December despite the rebound in equity prices.

Still, the bulk of the recent rise in US inflation have come from rent, services and an odd run-up in apparel. Most of that is in non-traded goods, a sector likely to feel little impact from Europe or Asia. The rise in the price of services also has roughly tracked the tightening of US labor markets, a force with real momentum. And so unfolds the source of the Fed's next likely surprise: a continuing rise in core PCE inflation that leads the Fed to start to raise its dots by June. That may be too soon for a hike, but the Fed should be setting the stage by then.

Zach Pandl and Daan Struyven of Goldman Sachs gave the Fed credit for the fourth largest policy surprise since the 2008 financial crisis (Quantifying FOMC Surprises, 17 March 2016). But that is probably prelude to another act later this year.